Title

Presentation

Operator: Welcome to the HEICO Corporation Third Quarter 2024 Financial Results Call. My name is Samara, and I will be your operator for today’s call. Certain statements in this conference call will constitute forward-looking statements which are subject to risks, uncertainties and contingencies. HEICO’s actual results may differ materially from those expressed in or implied by those forward-looking statements. Factors that could cause such differences include, among other things, the severity, magnitude and duration of public health risks, such as the COVID-19 pandemic, HEICO’s liquidity and the amount and timing of cash generation; lower commercial air travel, airline fleet changes or airline purchasing decisions which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions; reductions in defense, space or homeland security spending by US and/or foreign customers or competition from existing and new competitors, which could reduce our sales.

Our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales; cybersecurity events or other disruptions of our information technology systems could adversely affect our business; and our ability to make acquisitions including obtaining any applicable domestic and/or foreign governmental approvals; and achieve operating synergies from acquired businesses; customer credit risk, interest, foreign currency exchange and income tax rates; and economic conditions, including the effects of inflation within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues.

Parties listening to this call are encouraged to review all of HEICO’s filings within the Securities and Exchange Commission, including but not limited to, filings on Form 10-K, Form 10-Q and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law. I now turn the call over to Laurans Mendelson, HEICO’s Chairman and Chief Executive Officer.

Laurans Mendelson: Samara, thank you very much and good morning to everyone on this call. We thank you for joining us, and we welcome you to this HEICO third quarter fiscal ’24 earnings announcement teleconference. I’m Larry Mendelson, Chairman and CEO of HEICO Corporation. And I am joined this morning by Eric Mendelson, HEICO’s Co-President and President of HEICO’s Flight Support Group; Victor Mendelson, HEICO’s Co-President and President of HEICO’s Electronic Technologies Group; and Carlos Macau, our Executive Vice President and CFO. Now before reviewing our operating results, I would like to take a moment and thank all of HEICO’s talented team members for their contribution to our record-setting performance. Your continued focus on exceeding customer expectations and operational excellence translated into excellent results for our shareholders.

And I continue to be very optimistic about the future of HEICO. Over the past 16 quarters we’ve experienced incredible growth in our commercial aviation markets after emerging from one of the darkest times in aerospace history when air travel slowed to a crawl amid COVID-19 pandemic. I couldn’t be prouder of the professionalism and tenacity of our team members, who demonstrated serving our customers during this period of rapid growth. Their ability to meet the challenge of accelerated growth is commendable, and this includes the remarkable Wencor team members who joined HEICO family last year. In addition, I am pleased with the progress and effort of our team members have made serving customers in the defense industry. It is my expectation that growth in this global industry will continue despite who wins the upcoming elections, and the softer results we realized over the past few years appear to be in the rearview mirror.

And now I’d like to summarize the highlights of our third quarter fiscal ’24 record results. Consolidated operating income and net sales in the third quarter of fiscal ’24 represent record results for HEICO and improved by 45% and 37%, respectively, as compared to the third quarter fiscal ’23. I think you’ all agree that those are outstanding results. Consolidated net income increased 34% to a record $136.6 million or $0.97 per diluted share in the third quarter of fiscal ’24. And that was up from $102 million or $0.74 per diluted share in the third quarter of fiscal ’23. The Flight Support Group set all-time quarterly net sales and operating income records in the third quarter of fiscal ’24, improving 68% and 72%, respectively, over the third quarter of fiscal ’23.

The increases principally reflect strong 15% organic growth mainly attributable to increased demand for the Flight Support Group’s commercial aerospace products and services and the impact from our profitable fiscal ’23 and ’24 acquisitions. Consolidated EBITDA increased 45% to $261.4 million in the third quarter of fiscal ’24, and that was up from $179.8 million in the third quarter of fiscal ’23. Our net debt-to-EBITDA ratio was 2.11x as of July 31, ’24. That was down from 3.04 times as of October 31, ’23. Our excellent operating results have allowed us to early-achieve the forecast we made a year ago that our net debt-to-EBITDA ratio would return to historical level of about 2 times within roughly one year to 18 months following the Wencor acquisition.

And that’s excluding any impact of further acquisitions. Our acquisition pipeline is extremely robust with opportunities in both Flight Support and ETG, and we intend to follow our time-tested strategy of opportunistic acquisitions that continue to expand the cash generating ability of HEICO. Cash flow provided by operating activities increased 47% to $214 million in the third quarter of fiscal ’24, and that was up from $145.9 million in the third quarter of fiscal ’23. In July ’24, we increased our regular semi-annual cash dividend by 10% to $0.11 per share. This represented our 92nd consecutive semi-annual cash dividend since 1979. I’d like to now discuss our recent acquisition activity. You may recall, in December ’23, we announced the acquisition of exclusive perpetual licenses and certain assets from Honeywell International to support the Boeing 737NG and the 777 cockpit display and legacy displays product lines which that group has been performing extremely well for us.

As a result, in May ’24, we completed a second transaction with Honeywell International, under which we acquired additional licenses and certain assets to further enhance the manufacturing of these new products, including screens or military variant of the Boeing 737NG and 777 cockpit displays and legacy displays product lines. Last week, we announced that Flight Support Group acquired the aerial delivery and descent divisions of Capewell Aerial Systems. Purchase price of this acquisition was paid in cash, principally using proceeds from our revolving credit facility. And we expect this acquisition to be accretive to our earnings within the first-year following the acquisition. At this time, I’d like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO Flight Support Group, and he will discuss the third quarter results of the Flight Support Group.

Eric?

Eric Mendelson: Thank you very much. The Flight Support Group’s net sales increased 68% to a record $681.6 million in the third quarter of fiscal ’24, up from $405 million in the third quarter of fiscal 2023. The net sales increase reflects the impact from our fiscal 2023 and 2024 acquisitions, and strong 15% organic growth. The organic net sales growth mainly reflects increased demand across all of our product lines. As we continue to experience excellent organic growth within the FSG, we’ve also been highly successful in supplementing growth through acquisitions. Last week, we acquired Capewell, a Connecticut-based leading provider of proprietary aircraft cockpit, emergency egress and aerial delivery products for both the commercial aerospace and defense markets.

I am very impressed with their manufacturing process and strict adherence to high reliability and quality products, which help ensure pilot troop safety worldwide. They also have an excellent staff of people who will fit extremely well within the HEICO family. The Wencor operations continued to exceed our expectations, and we are convinced this was an excellent investment for HEICO. Wencor’s entrepreneurial culture and a record of producing high quality products continues to produce wins in the marketplace. Our customers continue to find great value in our larger aftermarket product offerings for their aerospace parts and component repair and overhaul needs. We continue to operate Wencor as a stand-alone business operation. However, we have made very good progress in working together and serving our customers in a combined seamless fashion.

Some examples of how we are now working together include: one, utilization of all HEICO and Wencor PMAs and DERs at all of our repair stations. Two, commercial and defense aftermarket sales cooperation. Three, Wencor e-commerce platform lists all HEICO noncompetitive PMAs. Four, Wencor is utilizing HEICO’s manufacturing base, in particular, our specialty products and Electronic Technologies Group, to quote new products. Five, engineering and regulatory cooperation. Six, sharing best-in-class vendors. And seven, driving various back-office synergies, such as payroll and export compliance, that will help offset the cost of additional regulatory compliance, such as Sarbanes-Oxley and HEICO’s FAA ODA program. The Flight Support Group’s operating income increased 72% to a record $153.6 million in the third quarter of fiscal 2024 up from $89.2 million in the third quarter of fiscal ’23.

The operating income increase principally reflects the previously mentioned net sales growth and an improved gross profit margin, partially offset by an increase in intangible asset amortization expense. The improved gross profit margin principally reflects higher net sales within our aftermarket replacement parts and repair and overhaul parts and services product lines. The Flight Support Group’s operating margin increased to 22.5% in the third quarter of fiscal ’24, up from 22.0% in the third quarter of fiscal ’23. Given that acquisition related intangible amortization expense consumed approximately 270 basis points of our operating margin in the third quarter of fiscal ’24, the FSG’s cash margin before amortization, or EBITA was approximately 25.2%, which is excellent in absolute terms and is 180 basis points higher than the comparable Flight Support Group cash margin of 23.4% in the third quarter of fiscal 2023.

I am extremely pleased with these results. The increased operating margin principally reflects the previously mentioned improved gross profit margin, as well as lower acquisition costs, partially offset by the previously mentioned higher intangible asset amortization expense. Now I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO’s Electronic Technologies Group, to discuss the third quarter results of the Electronic Technologies Group. Victor?

Victor Mendelson: Thank you, Eric. The Electronic Technologies Group’s net sales were $322.1 million in the third quarter of fiscal 2024, as compared to $325.9 million in the third quarter of fiscal 2023. The slight net sales decrease principally reflects lower other electronics and medical products net sales, partially offset by increased defense, space and aerospace products net sales. This is in line with our expectations as we’ve commented on our earnings conference calls over the last few quarters and is consistent with inventory destocking at some customers. We continue to anticipate quarterly volatility in the ETG’s defense net sales, but the overall trend remains very positive. As expected, other electronic net sales were lower during the third quarter of fiscal ’24 compared to the third quarter of fiscal ’23.

We believe these order trends in these markets have bottomed, and we are seeing improved orders in some of our companies in these other markets. These other markets typically equate to between 25% and 30% of our sales. We continue to expect an overall return to growth in these end-markets and businesses during the first half of fiscal ’25. The ETG’s record backlog and strong overall orders support our optimism, and as the non-A&D markets improve, we expect a healthy tailwind into our next fiscal year. Orders for commercial aviation and defense products have been very robust, and we are very pleased with our business’ performance, like at Exxelia, which continues to be a strong acquisition, meeting our performance expectations including growing its profit margins.

Further, our order book and quotation activity for fiscal 2026 is building nicely. And I did mean to say fiscal ’26, in addition to ’25, of course which augments our optimism for later periods as well. The Electronic Technologies Group’s operating margin improved 23.5% in the third quarter of fiscal ’24, up from 22.8% in the third quarter of fiscal ’23. I’d also note that before acquisition-related intangibles amortization expenses, our operating margin was above 27% as those intangibles amortization expenses consume around 400 basis points of our margin. And that’s how we judge our businesses as that most closely correlates to our cash. So when we look at how our businesses are doing on an operating basis, we are very pleased with the overall margins and their continued improvement.

The operating margin increase principally reflects the previously mentioned improved gross profit margin, partially offset by lower level of SG&A efficiencies. I turn the call back over to Larry Mendelson.

Laurans Mendelson: Thank you, Victor. Now for the outlook. As we look ahead to the remainder of fiscal ’24, we remain optimistic about achieving net sales growth for both FSG and ETG. This growth is expected to be largely fueled by the contributions from our fiscal ’23 and ’24 acquisitions, along with sustained demand for the majority of our products. Additionally, we are committed to ongoing product and service innovation, further market penetration, and maintaining our financial strength and flexibility. In conclusion, I want to again express my gratitude to the exceptional team members for their unwavering support and dedication to HEICO. Our strategy of building a diversified portfolio of outstanding businesses continues to deliver positive outcomes for our shareholders.

Our key markets are very strong, and in fiscal ’24, is shaping up to be another successful year. Thank you as shareholders for your continued trust. And as I mentioned before, I remain very optimistic about the future for HEICO. And now we’ll open the floor to questions.

Operator: [Operator Instructions] We’ll take our first question from Robert Spingarn with Melius Research.

Robert Spingarn: Well, good morning, and a very nice quarter.

Eric Mendelson: Thank you very much Rob, good morning to you.

Robert Spingarn: A couple — I thought I’d start with the end-markets. And Eric, FSG’s organic growth rate accelerated relative to the prior two quarters. And I was wondering, does this reflect the maturing integration that you just talked about between HEICO and Wencor? Or is this simply a function of the market, maybe demand strengthening in the end-market and aftermarket?

Eric Mendelson: Yes. I think that’s a great question, Rob, and I spent a lot of time in business reviews and with our sales folks, in particular, over the last month going over a lot of the details. There is no question that the market remains strong. But I do think the reason why the incredible 17% growth rate was so outstanding is because of really two factors. One, we continue to win in the marketplace. And HEICO is an accumulation or a combination of a lot of individual businesses working as hard as they can, planning years in advance, developing these products, having them on the shelf and being able to hit the demand and get them sold when the market needs them. So I think that’s number one. Really, everybody’s sort of, if you will, all the unsung heroes who are working their rear ends off every day to make this happen.

So that’s probably the first reason. The second would definitely be due to the addition of Wencor and the broadening of our product line. I think in speaking with our customers, we’re viewed as a much more complete supplier. I mean, HEICO today has transitioned tremendously over the last many decades. And I think our customers are very confident in purchasing additional products from us, whether it is parts, distribution, PMA, repair. And I think we are growing our market share. So it’s really, I think, yes, a strong market, but more I think really focusing on the detail by our businesses and the broadening of the product-line through Wencor and the 737 and 777 display unit acquisitions.

Robert Spingarn: Okay. And then notwithstanding the strong growth, there have been some airlines out there talking about overcapacity that’s been a bit of a theme here. Are you seeing any evidence of that in the order patterns so far?

Eric Mendelson: No, we really don’t, actually. And as a matter of fact, the number of airlines have sort of trimmed back their purchases. They, if you will, in hindsight, I think over-ordered a bit in 2023, took more than they needed in 2023. So we do have anecdotal evidence of certain customers cutting back this year. But that was really offset by strength at other customers. So I think we continue to do very well. And that really — that gets to the sort of the beauty of the HEICO model in that we’ve got all these individual business units who have — who control their own destiny. And if they are short in one area, they figure out how to make it up in another area, and this doesn’t roll up to my desk after the fact and instead they are doing this real time. So in summary, no I mean, the market for us remains quite strong.

Robert Spingarn: Okay. And then just on the OE side, both you and Victor have some exposure to commercial OE. Are you seeing any slowdown in orders on the OE side because of the slower than expected production ramps both at Airbus and Boeing? Or do you continue to ship at the higher target rates and they are just taking inventory?

Eric Mendelson: Yes, we’ve definitely seen a reduction off of forecast due to their build rates. There is no question Airbus is doing, I think, better than Boeing in that area. But yes, definitely on the commercial OE production, things are softer than expected. That, of course has been offset by our strength in the defense side, and we expect that strength to continue into 2025, 2026 and after based on our conversations with our customers and what they want there.

Robert Spingarn: Okay. And then here is a question, Larry I thought I would ask you this question, but anybody please jump in. You continue to be acquisitive. You just did another deal. How would you characterize the M&A pipeline as it stands today maybe relative to the prior year or so? And is there any change in behavior from private equity folks who are out there with properties to sell?

Eric Mendelson: Rob, this is Eric. I’ll take that just for a moment. Of course, a year ago, we were largely focused on Wencor is our largest deal in the history of the company, over $2 billion and that consumed a tremendous amount of capital as well as effort. So — but I can tell you that our pipeline today remains incredibly robust. We have a lot of projects in the work. Our acquisitions teams are nonstop running around the country. I think we worked very hard to differentiate ourselves as the buyer of choice. And we’ll keep our fingers crossed that some of these will come to fruition. But there is no question that in conversations, and I don’t want to call out individual businesses because they have their own respective sellers and reasons for having dealt with us.

But I can tell you that on all of our recent acquisitions I think HEICO’s reputation has been key to getting all of those deals done and has made us a particularly attractive counterparty for our sellers and partners. And the pipeline remains very, very strong.

Laurans Mendelson: Rob, I know — this is Larry. I know you asked me the question, but Eric pre-empted me. So what he told you is accurate. The pipeline is very full. And we are looking at actually too many acquisitions right now. It’s taking full time of the staff and it’s — we’re looking more for nonprivate equity deals. That’s more in our best interest, although we do see some private equity. The problem is they are priced very high. And when we try to compete, normally, we can’t compete because of the pricing. But we have enough non-private equity deals really to fill all that we need. So for us, it’s a buyer’s market right now.

Robert Spingarn: Got it. Got it. And just quickly, Carlos, if I could ask you what the blended organic growth rate was in the quarter. Thank you.

Carlos Macau: You’re talking about for the company as a whole?

Robert Spingarn: Yes. So when you factor all in, yes.

Carlos Macau: Yes. So all in, it was a tick over 7% organic growth for the whole company.

Robert Spingarn: Okay, excellent. Thank you all.

Carlos Macau : Thank you Rob.

Operator: We’ll take our next question from Bert Subin with Stifel.

Bert Subin: Hey, good morning and thank you for the questions.

Eric Mendelson: Good morning Bert.

Bert Subin: Maybe, Eric just to start with you on the FSG side. I think you mentioned sort of accelerating growth, organic growth of 15%, extremely impressive. Last quarter, you had talked about the aftermarket replacement parts side being, I believe, 21% growth, and you called out about one-fourth of that being priced with the discount relative to OEM being close to the widest you’ve ever seen it. So I’m curious, how did that change in the fiscal third quarter? Was pricing increases an element of that growth? Or does it continue to be more of a volume story?

Eric Mendelson: Yes. Hi Bert. So the short answer, it’s more of a volume story. I think last — so this quarter, it was 17% for the parts business. And last quarter, I think it was 21%, as you mentioned. Most of that is volume. Some of it is price, but I would say it is definitely mostly on the volume side. We’ve been very firm about passing along our price increases to our customers. And we’ve got to make sure as our costs have gone up and whether that’s labor or special processes, material, purchased product, whatever it is — we’ve got to make sure that we get that passed along. So definitely, the vast majority of that is volume and then a much lesser extent would be the price.

Bert Subin: Eric, as you think forward for FS — I guess, just for the aftermarket replacement parts business, I know it was brought up earlier on the airline side, you are seeing trimming capacity, lower yields. It doesn’t sound like that’s had any impact yet. Do you think there is an opportunity to gain meaningful share if we go into a little bit of a slowdown just because it opens up or, I guess makes the portfolio more attractive to customers that maybe bought PMA parts in sort of a lower percentage? Or do you think that becomes sort of the element where pricing maybe balances with volume? Just curious how you’re thinking about maybe the next several quarters if things do slow down.

Eric Mendelson: Yes. Again we haven’t seen signs of any slowdown to-date. As a matter of fact, quite the contrary, sort of surprisingly to the contrary. And with regard to normally when there is a slowdown, obviously volumes drop, and that is when we pick up additional market share. That’s when customers realize that they’ve got to take advantage of our additional cost savings, parts and repairs. And we pick up market share at that point. And then of course, when the economy recovers, we recover even stronger than most because we’ve picked up market share. The customers are very, I think very excited about the HEICO product line. They want to have competition, they are demanding competition, and HEICO provides very fair competition in that regard. So I think that we are going to do very well and, for sure pick up market share, get additional parts and repairs designed when that — if that occurs.

Bert Subin: Very helpful. And just one last question for Victor. Victor, if we look at the ETG business over the last several quarters, sort of bounced around from positive to negative on the organic side, sort of averaged about 0%. I think that business is meant to be sort of longer term low to mid-single-digit organic. I guess sort of a two-part question. One, I think earlier in the year, you were expecting this more significant ramp in the back half. I’m just curious what changed that outlook? And then two, as you go into FY ’25 is there a potential that growth sort of exceed your longer-term growth target just as a function of recovering?

Victor Mendelson: Yes. Thank you, Bert. They are good questions. I don’t think where we are and so far in the back half of the year has really been a surprise to us. I think we tried to hint in the second quarter call that we thought, for example margins were higher in that period that we would look for an average over the course of the year. So it is not really too far out of line, maybe slightly. We are doing the budgets for fiscal ’25. But when I look at our backlogs and I look at our order rate, it feels to me as though we would have a stronger growth rate in fiscal 2025. Again, it’s a little premature for me to say that with certainty because our companies do their budgets now and submit them in early October. So I’m waiting on those. But right now, that’s how it feels to me, yes.

Bert Subin: Thanks very much.

Operator: We’ll take our next question from Larry Solow with CJS Securities.

Larry Solow: Thanks so much. Good morning everybody and thanks for taking the questions and congrats on really impressive growth and even, Victor, it sounds like some good bookings growth for your side of the business. So it looks like we’ll be having, hopefully, some good couple of quarters upcoming. I guess a question, Eric for you, just a couple — thank you for some of that detail on the Wencor. So it sounds like you are certainly getting, it looks like, some revenue synergies and stuff combining a lot of common services and whatnot. I’m just curious like, I don’t know if you could break this out, but has your organic growth at Wencor kept up or even exceeded sort of the overall growth of FSG over the last few quarters?

Eric Mendelson: I would say it is very consistent with FSG. I mean we look at the various Wencor businesses, and their organic growth is very consistent. I mean some are — there can be little anomalies here or there. But in general, they are doing very well and consistent with the legacy HEICO businesses.

Larry Solow: And has the overall — obviously, the PMA parts offering has increased — one plus one certainly equals two. But has it increased even more? Have you increased your overall offering apart? Does that help growth in the last few quarters?

Eric Mendelson: Yes, it has. And the overall offering has grown. And we’ve really seen the advantages of that, and frankly, the customer enthusiasm around it.

Larry Solow: Got you. Just a question, well it sounds like the Capewell acquisition, a nice little tuck-in. Any more color on that? It looks like, I guess, it is going to be in specialty products, so a little more niche, higher margin stuff, maybe a little bit more some choppy sales, bigger quarters sometimes, right? Is that how to look at that kind of –.

Eric Mendelson: It is a terrific business, and they basically have two main product lines. One is the commercial and military — I’m sorry, the commercial and military aerial descent business. So basically, when you are — the cockpit egress business, you need to have basically a way out of the cockpit in case the cockpit door is blocked, or also cargo aircraft or tankers need egress from the aircraft in the event of a problem. And they have a very sophisticated, well time-tested, appreciated product, which is in a number of commercial and military aircraft, which is really key and really the only way to get people out of the aircraft in the event they need to escape. And the standard slides are either inactive or don’t exist on certain types of aircraft.

So that’s part of their business. And then the other part of their business is the area of descent piece, whether you’re parachuting out of an airplane or if they’re dropping tanks or various equipment, the C130s or C-17s or whatever it is, you’ve got fairly sophisticated parachutes that attach to it, and there are various attachment mechanisms and aerial drop mechanisms, which are really critical. So we think that this is a great business. It’s really appreciated by its customers, and frankly, is the pioneer in this business and since the 1940s was the original company that designed the device, which permit paratroopers to jump out of airplanes and to detach once they hit the ground and not get dragged as a result of the parachute. And so that’s a very strong business.

It’s a very nichey business, and that’s why we thought it fit very well in our Specialty Products Group. And of course, our specialty products has a lot of connection to the overall — to the other parts of Flight Support. So I think it’s a very good fit. We’re very excited about it.

Larry Solow: Excellent. I guess just last question, maybe pass to Carlos. Just on the margin, you mentioned, respectively, on the FSG and ETG up to 25% and 27% on the cash operating margin. Perhaps not so much in the next quarter or two, but where do you see those margins over the next three to five years? I mean can they continue to pick up on the cash side you look at?

Carlos Macau: So the answer to your question is, as we continue to grow the volume of the business, we do expect to eke out incremental margin gains consistent with our history. As the base of the business grows, the amount of overhead needed to support it is relative to that growth, it’s a little lower. So I expect we’ll get that. If you look back, I’ve quoted this before, if you look back a decade, and look at the margin gains, that’s kind of what I would expect going forward once we sell into our footprint here in the FSG and ETG. And I do think you’re talking about an EBITA margin, so it’s pretty elevated, we were happy with it this quarter. And I think that as we move forward, that should continue to stabilize and eke out improvements.

Larry Solow: Great. Excellent, thanks everybody.

Operator: We’ll take our next question from Peter Arment with Baird.

Peter Arment: Thanks good morning Larry, Eric, Victor, Carlos. Nice results. Victor, could you talk a little bit about — you talked about some of the booking rates and sort of the confidence, and you start to seeing ETG growth thinking about next year. But just maybe some of the end-markets that you are seeing, is defense, I assume it’s almost 50% of your segment, is that growing mid-single digits and it’s just other areas that are seeing some softness? Or maybe just a little more color there. Thanks.

Victor Mendelson: Yes. So Peter, the defense part of the business and commercial aviation really have been extremely strong, experiencing double-digit growth. And again that is where some of our longer-term bookings really come on the defense side. And seeing some of those fill out beyond ’25, as well as some of the quote activity in the order indications, again, to 2025 and beyond. So right now, I feel like defense is a good leader for us. And commercial aviation has really been phenomenal. So when I take that together, I look at the other markets, which are down consistent with, I think, what other people are seeing in these kinds of markets, and it looks like those order rates are bottoming out. It appears to us that our customers have kind of used up the excess inventory and the orders are coming in, and if you add a sort of six month lead time on that — it gets us into fiscal ’25.

And that’s why I say I feel like there will be a very nice tailwind from that next year. Of course, I can’t be certain on that, but that’s just how it feels right now.

Carlos Macau: Hi, Peter, this is Carlos. I just want to point out, you are not wrong on what you said about 50% of the segment. But right now, we’re tracking around 40%. So we still have — I’ve mentioned in the past, once the mix sort of settles down, I do expect our defense to become closer to the 50% number over time. Right now, we are still a little behind on the total revenues in the segment being only around 40% for defense this quarter.

Peter Arment: Okay. That’s helpful. And then just, Carlos, maybe just sticking with you, on the leverage, it is come down exactly where you guys kind of thought it would, to 2.1 turns. How are you thinking about just given that the M&A pipeline is full, but your ability to kind of want to still delever, what’s — any updated thoughts on kind of where you’re taking the leverage to?

Carlos Macau: Well, I think, look — we — by nature, we’re an acquisitive company, and we set out an aggressive timetable to pay down some of the debt that we had, and we’ve done that. I think the opportunities are abound. As long as we can keep our leverage candidly under three, there is opportunities for us. And I think that the goal for us is to find very profitable companies that don’t disrupt that leverage, the ones that have real high EBITDA, which has been our history, right? I mean we like high margin businesses. So the more acquisitions we do with the higher margin, the less impact it has on our leverage. And that’s where I’m steering things when we talk internally about these deals.

Peter Arment: Terrific, I’ll leave it there. Thanks guys.

Operator: We’ll take our next question from David Strauss with Barclays.

David Strauss: Good morning. Thanks for taking my question. I wanted to ask about working capital. Last year, you had a fairly big inventory build. This year, fairly big inventory build. How are you thinking about potentially slower growth or working capital or maybe working capital just coming down on an absolute basis from here?

Eric Mendelson: Hi, David, this is Eric. I’ll start out with sort of the big picture and then Carlos will get into the specifics on the financial. HEICO has always been focused on customer service, making sure that we capture all of the incremental sales that we can capture. And if you look at coming out of COVID, HEICO recovered much quicker than most. And as a result of not cutting our people, not trimming our inventories too much, and bottom-line, we were able to support the market when others weren’t. And that’s really been a huge HEICO advantage. So I can tell you from an operational perspective, Victor and I are very, very focused on all of our business units, reviewing working capital, understanding specifically how the inventory or the receivables have increased.

Obviously, receivables, that’s up due to the huge increase in sales. But with regard to inventory, our businesses have been really outstanding in terms of having the correct inventory on the shelf. There are a lot of companies where their inventory blows up and they’ve got the wrong stuff on the shelf and they can’t sell it, and then people find out after the fact that it’s a problem. HEICO has always been very, very careful not to do that. And as a result, we have very, very robust inventory reserve policies to make sure that we are being very proactive and we make sure that we have the right inventory. So I think that there is no question that there is a big internal focus on inventory. We want to slow the growth. But it is really key to our business.

And frankly, when you look at the 17% organic growth that we had in the aftermarket business, I mean that was really outstanding, and that can only be accomplished through increased inventories. But Carlos will get into the specifics for you.

Carlos Macau: I don’t know how much more I could add to that. I would say that the rate of increase in inventory spend has come down relative to the growth in the business. I mean, our sales are, for the quarter, up 37% comparatively and our use — our inventory spend is not ramping at that pace. So I’m happy with that. I think what I mentioned earlier in the year, David, was that we had a fair amount of orders outstanding on firm commitment inventory that some of our subsidiaries had made two years ago just because of lead times. And so we made good on those. We are not the type of company that disrupts our vendor base or does bad things to our vendor base to take advantage of a moment in time, going to be partners with our vendors and make sure that we’re good to them as they — we expect them to be good to us.

So the rate of those firm orders has come down. We are now sort of beyond that, and I do expect use of working capital, particularly inventory to come down a little bit. But it will continue to grow a little bit as we — as the business grows, as Eric pointed out. So I wasn’t as pleased this quarter with the working capital use. We expected it. And again, the rate of change in that inventory spend is down considerably compared to the first half of the year.

Eric Mendelson: And also, David, just to add one other little anecdote. Of course, the purchase of the 737NG and 777 display unit business was the purchase of a product line. And as a result, a good chunk of the inventory increase was due to that. So that really is an acquisition. It’s a new business. It’s all good inventory. But that obviously shows up as inventory. So you have to sort of take that into account. So when that stripped out, the increase is much smaller.

David Strauss: Great. Thanks for the detailed answer. The other question I had on FSG margins, I know you talked about the year-over-year improvement. But margins did drop. GAAP margins did drop a little bit sequentially. What drove that 50 basis point drop sequentially? Was that mix or something else?

Carlos Macau: There is — I think, David the — what we’ve told folks, there is nothing unusual about what’s happening in the margin sequentially. I think what we’ve told folks is that we expect the segment to run between 22%, maybe as high as 23% as it has been in the last quarter. I don’t think there is anything usual going on. It’s ebbs and flows. You have a little shift in mix. As Eric pointed out, some of the commercial business was down in Specialty Products. The parts business is doing very well. That is margin helpful. The repair business is growing also. That is a little bit less accretive than the parts business. So you are going to have puts and takes as we get the business to sort of settle into the vertical footprints of the segment. So I wouldn’t look – there is no one-times or odd things going on in there.

Eric Mendelson: But David, this is Eric. Also the way that I look at it from an operating perspective is, a year ago, our EBITA margin, or what we call the Flight Support Group cash margin, in the third quarter was 23.4%. This year despite the acquisition of Wencor which was at a sort of a lower cash margin, we’ve been able to increase the cash margin up 180 basis points to 25.2%. So I think those numbers are really outstanding. And this, as Carlos says, they just bounce around. I mean we — that’s why we say, it is going to be within a certain range, but that’s just standard noise.

David Strauss: Got it. Okay, thanks very much.

Eric Mendelson : Thank you.

Operator: We’ll take our next question from Pete Skibitski with Alembic Global.

Pete Skibitski: Good morning guys. I guess to start with, Eric. Eric last quarter, you guys talked about the supply chain negatively impacting the repair business. And I think maybe it sounds like it did a bit this quarter as well just because it sounds like parts kind of drove the business. So can you talk through kind of do you see any light at the end of the tunnel there or maybe more specifically what’s going on the supply chain?

Eric Mendelson: Yes. I would say, Pete we definitely have supply chain problems all over the business. It’s — our vendors are challenged. There’s a huge demand out there and getting — we really got to be on top of your supply chain. You got to be on top of your vendors to make sure that you’re prioritized and that they do is what they expect. We still have a large backlog of past due. And frankly, that’s driven by certain vendors or many vendors’ inability to produce according to their commitments. So that continues to be a struggle. And frankly, I don’t see a tremendous amount of improvement in the aviation supply chain. Basically, demand is just outstripping supply. A lot of people retired. Some businesses shut down, some businesses lost their, if you will, special processes.

Despite everyone knowing that this is a high-tech industry, there are a lot of, I would say, less documented processes out there with suppliers. And when they didn’t need to produce for a period of time, largely as a result of certain large OEMs ripping out all their orders very quickly, those folks retired and a lot of these special processes went away undocumented. And the industry has really struggled. And I think this is why, if you look at the air framers, the engine manufacturers, they have really, really struggled, as a result of their actions, and basically slashing the supply chain the way they did. This is why HEICO, we fought like hell to keep our people to lay-off as few as possible to figure out how people would go to reduce schedules, because we knew that when the industry came back, we wanted to make sure that our most valuable asset was going to come back.

And I can tell you that there are companies out there who just went and cut 40%, 50% of their workforces, not on a temporary basis, but on a permanent basis. And as a result, when they go back and they try to hire these folks, they can’t get them back because some of retired, some are pissed off, all sorts of reasons. So it’s a long road back. And I think that’s why the major manufacturers are having a big, big problem.

Pete Skibitski: Okay. So you would say just go forward, you expect the parts business to grow faster because, that business, you are less beholden to suppliers versus the repair business?

Eric Mendelson: I wouldn’t – it is hard to say which will grow faster. We are pretty confident of our growth in both. There is no question that when you ship individual parts, you are less impacted by a particular suppliers inability to supply because you ship all the other parts that you have in stock. Whereas when you are overhauling a component or a line replaceable unit, LRU, you can only shift the component if you have all the parts. So if there is a bill of material of 200 parts and you are missing one, you’re not shipping that unit. So that creates complications. And of course, when you’re building a complex assembly like an airplane or an engine, then you have that problem in spades. But I think all of our businesses are performing quite well. It’s just that there is plenty of past-due backlog and sales actually could be even higher if we had those parts in from our suppliers.

Pete Skibitski: Okay. That’s helpful. I appreciate that. And if I could just ask one to Victor. Victor, you touched on it, but I was wondering if you could talk more about the medical and other area in ETG. And almost if we could bifurcate it because I know the medical portion had that COVID-type surge and now it is kind of normalizing. I imagine in the next quarter or two, that will kind of normalize. But is the broader economy negatively impacting the other portion of medical and other? Or are you not — is that growing more strongly than medical is?

Victor Mendelson: Yes. I think what happened in medical is we had very strong orders in actually ’21, ’22 at first and the things we make, it was — some of it was stronger, but a lot of it was weaker. Because if you remember, they talked about the elective procedures and things like that — that were deferred. And then there was a surge in 2021 and 2022 and even part of 2023. And then I think what happened was the manufacturers concluded they had too much on the shelves, and I think maybe some of the orders at the — at our customers’ level, right from the end-users, did not materialize or they were slower. They have had to work through those — that inventory. And we are now seeing more of the customers coming back to us saying, you know what, can you move things to the left, right?

As opposed to moving them out to the right before as opposed to deferring them, can you pull these in? Can you ship sooner? We were going to defer this order, but now we’re not going to, right? We were having discussions like those. I don’t know if it is a sign of the broader economy as well mixed into it. It’s a good question and I wish I had great visibility on that. But I do know at the very least, it seems like a classic case of over-order and higher expectations for, let’s say, the actual health care delivery from the health care delivery system out of manufacturers.

Pete Skibitski: Okay. So it sounds like you think that the destocking is about over in the next quarter or so, it sounds like?

Victor Mendelson: Yes. That’s how it feels to me. I would say we’re — I’ve seen some signs, some green shoots, so to speak, but it feels more kind of in this bottom or bottoming mode. But we are seeing much higher quote activity. And usually, not always but usually, that’s an indication that gets followed up by orders not long after.

Pete Skibitski : Okay, great. Thanks guys.

Operator: We’ll take our next question from Louis Raffetto with Wolfe Research.

Louis Raffetto: Hi, good morning gentlemen.

Eric Mendelson: Good morning Louis.

Louis Raffetto: Maybe I can just start with, I guess, couple of things I noticed. Impairment charge, not something we see from you guys. So just was curious if you had any sort of additional information about that. And is that at all related to the change in the contingency consideration as well? Just not sure if those kind of offset each other on the income statement or if one was in one spot and one was somewhere else.

Carlos Macau: So this is Carlos. The impairment charge and the contingent contingency reversal were both within the ETG segment. They were for two different subsidiaries. One was related to a business we have that is in the space industry where some of the end-markets have changed, the revenue projections have come down. So this is a trade name impairment. It is just essentially math. The business is doing fine. It is just our expectation is a little higher on the business when we bought it as far as putting a value to a trade name. And so we came to the conclusion this quarter that we would impair that trade name a bit. The contingent earnout was due to change in circumstances at one of our subsidiaries whereby the likelihood that they would meet the earn-out objectives was low.

And it was kind of a clip earnout, so it was an all or nothing thing. So that occurred this quarter when it became apparent to us that they weren’t going to earn that earnout. So it is a coincidence. They happened at the same time, 2 different subs. They both went through selling — they went to general administrative expenses, so they kind of offset each other. It was a bit of a non-event.

Louis Raffetto: All right. Appreciate the color, Carlos. And then maybe just the Capewell deal. I know it is not hugely material, but anyway, just to size at least from a cash usage in the fourth quarter?

Carlos Macau: Yes. I don’t think — I don’t believe — I don’t think it’s going to be a big cash usage. I mean we’ll — we borrowed for the majority of the acquisition. It should be a good deal for us. It’s a good margin business. It, as Eric pointed out, it does nichey stuff in aviation parts and some military. And so more to come, we’ll see. It’s not a – it is an immaterial acquisition for HEICO in total, so we’re not giving out too much of the financial details or anything like that. But it is not dilutive to the segment margins, if that is part of your question.

Eric Mendelson: Yes. I can tell you, I’m really excited about this business, excited about the technology, the people, the capability. You look at what — on the two businesses, I mean, one is the cockpit or aircraft egress. These are really critical, very cost-effective solutions. If you don’t have these solutions and the airplane catches on fire in certain situations, it’s going to be really bad. And these solutions are time-tested and work extremely well. So we are really happy for them to be in the HEICO portfolio. And if you look at the military threats that are facing this country and the world today, the aerial drop solutions are really, really critical. Super, super critical. And we are working on a number of programs with various militaries around the world.

But if you’ve got to deliver material at hotspots where you don’t control the ground, this is the only way to do it. And there is all sorts of unique technology going on now which is going to further drive this because now, of course we are able to have these autonomous vehicles, you are able to drop all sorts of autonomous vehicles. And there is going to be a huge demand for this. So we think that it’s really a good space to be in. Great name. This company, I mean, Capewell was the pioneer in this space. Whether it is paratroopers, or they also have the ejection seat release mechanism. So if you eject from a fighter aircraft and you’ve got a release as you — at a certain point, you’re able to do that. And they’re really very, very well accepted by the customers around the world.

So I think it is going to fit extremely well in the HEICO portfolio.

Louis Raffetto : Really, appreciate it. Thank you.

Operator: We’ll take our next question from Ken Herbert with RBC Capital Markets.

Kenneth Herbert: Hi, good morning Eric. Maybe, Eric, I just wanted to start with you in the FSG segment. As you think about — since you acquired Wencor, you’ve basically sort of been 2x-ing your organic growth relative to sort of volume growth in the industry if I assume sort of high single-digit 10% ASK growth we’ve seen over the last several quarters. As you think about normalizing, now you have Wencor and the opportunities from price, share gain, secular trend in terms of PMA growth, is sort of 2x volume growth the right way to continue to think about how you view your aftermarket opportunity within the segment sort of beyond fiscal ’24?

Eric Mendelson: Well, we certainly hope so. I don’t know whether 2 times is the correct number. We’ll, I guess, find out after the fact. But there is no question that we had significant growth in excess of the market, whether you look at ASMs or whatever other factor, we are really growing well. And yes, that is a result of capturing market share. And there, frankly is still a lot out there. So we’re working really, really hard to make that happen. Frankly, if you had asked me this many years ago, whether we’d be at this number, I wouldn’t have thought so. But our people continue to surprise us, as a result of their hard work. So we hope so, but I guess time will tell.

Q – Kenneth Herbert: Okay. And as I think about the share opportunity, are you seeing it more from new customers that airlines that maybe you haven’t worked with before? Or is it sort of a greater capture of the wallet at additional customers, and any sort of differentiation you can provide along those lines?

Eric Mendelson: Yes. I mean we pretty much deal — we sell to, I would think, every single airline in the world, certainly every major airline in the world. So it really is a story of additional capture at those airlines. That’s really the big — that is the big key for us.

Kenneth Herbert: Okay. And just finally can you quantify the Honeywell sort of the product line impact in the second quarter growth, or I’m sorry, the third quarter growth?

Eric Mendelson: I don’t — Carlos, I don’t know if we’re providing –.

Carlos Macau: So Ken, what I could tell you is that roughly $217 million, just a tick under $217 million of sales in the quarter were inorganic, were acquired. And so most of that was Wencor and a little bit of the legacy display business.

Kenneth Herbert: Okay. Perfect.

Eric Mendelson: I should add, Ken, that again just as I mentioned about Capewell in the prior call — prior question, we are very excited about the legacy business. And we think that this has got tremendous potential, gets us into a unique technology. And we are really very, very excited about it and happy to entrench ourselves even deeper with our customers. So I think that that was an outstanding product line acquisition, and frankly, something that’s extremely transformative for HEICO because it really puts us into the guts, a key part of the airplane. I mean when you go — next time you go in a cockpit on a 737 or NG, just take a quick look in there and you’ll see our six big screens. And that is really very high visibility of course, for the pilots, but too within the airline.

And we have very, very good customer response thus far. They are very happy that HEICO has entered this business, and we’ll give them the turn time and the quality that they expect. So I am very bullish on that.

Kenneth Herbert : Thanks Eric, I’ll pass it back there.

Operator: Our next question comes from Sheila Kahyaoglu with Jefferies.

Sheila Kahyaoglu: Thanks so much. All of them good morning. A few questions, if that’s okay. I’ll start out with Victor and then go to Eric for the last one. Victor, maybe can you talk about, just to double check, the trade name impairment, that $6 million is offset by the contingent liability this quarter, so they net out. And if you could give us an idea of cash margins, 27% cash margins this quarter versus 28% last year, kind of what happened there? And how do we think about pre-Exxelia cash margin?

Victor Mendelson: Sure. I’m going to let Carlos answer on the impairment and the cash margins. And I will just comment that the Exxelia business, as a rule-of-thumb penalizes us by about 200 basis points of margin and somewhere in that zone. But I’ll let Carlos, if, Carlos you don’t mind taking that.

Carlos Macau: Sure, sure. Good morning Sheila, so as I mentioned earlier, the impairment, in the world of accounting, you have to assess all these intangible assets all the time. And when you establish purchase accounting on day one for an acquisition, you make estimates on what you think the revenues are going to do. And when you have a trade name, it is a static intangible asset, it doesn’t amortize. You have to look at it under impairment model. In this particular case, there was a change in some of the end-markets that affect one of our subs and we thought it was prudent to impair some of that trade name this quarter. And that’s really what it was. Nothing spectacular. We do the analysis every quarter. We look at it annually.

And it just so happened this quarter we decided that to impair that trade name made a lot of sense. Candidly, it makes my life easier because any time you can get stuff off the books like that, it is less things to housekeep on a quarterly basis. So that’s why we did it.

Sheila Kahyaoglu: Got it. So they net out each other?

Carlos Macau: They do, yes. The contingent earn-out change and the impairment. One was — the earnout change is about $5.5 million in ETG, positive, and the negative was a $6 million earn-out. So it’s roughly about a $500,000 drag, not significant at all to the operating margin.

Sheila Kahyaoglu: Thanks, Carlos. And good morning. I wanted to just ask about cash margins year-over-year. I think they were down 100 bps. Is that right? In ETG?

Carlos Macau: Yes, down just a tick. And I think that is just because of the volume drop. If you listened to what we said earlier, the end-markets, the other electronic products, so non-defense, non-space, non-aerospace those other lines of business we serve is roughly 30%, give or take of the segment. That business is down, as Victor talked about earlier. What’s, I think, contributing some of the drag on the margin is the SG&A spend that we have has not really materially changed. Again, as Eric talked earlier, we don’t really have knee-jerk reactions at HEICO if one of our businesses is having a challenge in any particular quarter or year, unless it is something that we believe will last a lifetime, we don’t ask them to right-size their business.

We actually want to retain that talent and keep that overhead spend, so that when the business turns, we are there to support our customers. I believe that that contributed. We talk about that as SG&A inefficiencies or lack of efficiencies in SG&A, that’s really, I think what the volume aspect and the impact of that has had on the segment. And that — once those sales come back, which we expect they will turn, I think the order volume and the backlog supports that judgment, that will go away and you should see some expansion in the margins.

Eric Mendelson: Sheila, this is Eric. Although this isn’t my area, but looking at the numbers, it looks like to me actually that the cash margin at ETG went up roughly 70 basis points from last year. So it is improved. Yes.

Sheila Kahyaoglu: Okay. Sorry, I must have had the wrong number.

Eric Mendelson: Yes.

Sheila Kahyaoglu: I’m going to get to you, Eric, I promise. But Victor, maybe just — I know you’ve been at this for 12 quarters straight. Why do you think the defense markets are dragging when even underperforming peers are starting to see double-digit defense growth?

Victor Mendelson: We had double-digit defense growth this year, so I don’t think we’re underperforming. I think we have excellent defense growth this year.

Sheila Kahyaoglu: Okay. Got it. So that 30%, that’s the drag. And then last question, Eric…

Victor Mendelson: The drag is from the other markets for sure.

Sheila Kahyaoglu: Okay. Eric, you laid out seven sort of opportunities, and whether it is revenue or cost synergies that have happened with Wencor, maybe if you could talk about — you made a comment about commercials and sales operation and Wencor lifts all PMAs now. So how do you think about where the PMA focus is when we think about HEICO and Wencor, as a combined entity going to an airline, how does it allow you to upsell?

Eric Mendelson: Yes. So what we do, we still go as individual businesses to the airlines which is really typical of the HEICO model. Because even though we have, for example even pre-Wencor, within the HEICO parts group or the HEICO repair group, there are many subsidiaries. So for example, in the HEICO parts group, there are 6 PMA companies. And within the HEICO repair group, there are 11 repair companies. And those companies already went individually to the airlines to make sure they were supporting their product and to find additional opportunities. So we still — there may be an overall, if you will HEICO parts group contract and contact and as well as a HEICO repair group contact and contract. However, we always sent the individual businesses in because they’re the ones who are most knowledgeable about their product lines.

So you want to go sit down with an engineer or somebody in the shop, there’s nobody better than somebody who’s really into the details and understand everything there is to know about that particular product: the materials, the metallurgy, the dimensions, the manufacturing process, how it’s inspected, how it is installed, how other people are using it. And that’s always been the strength of HEICO. And fortunately, Wencor has done exactly the same thing. I think, frankly, they saw the HEICO model — this is pre-acquisition. They saw the HEICO model, and they thought that it worked quite well, and imitation is the greatest form of flattery, and they adopted it. So there’s no change. So Wencor goes in the same way, really understands their product, and they make sure on a parts and repair basis that they’re in there at the detail level.

Now having said that, we do get executives and other senior leadership from the airline saying, hey, look, you guys got 19,000 PMAs and you’ve got thousands of, whatever the number is, 7,000 DERs, and I want to understand what we can do as a bigger package. And so when they want to do that, then we are able to aggregate it and show them the greater overall package and what they can achieve. And we’ve been very successful in presenting that. But again, when it comes in to tactically dealing with the airline, we make sure that each individual business is well tied in to do that.

Sheila Kahyaoglu: Got it. Thank you so much.

Operator: We’ll take our next question from Michael Ciarmoli with Truist Securities.

Michael Ciarmoli: Thanks for taking the question and thanks for sticking around here. Maybe, Eric, just back to Ken’s line of questioning, and even what you’ve been talking about. You are outgrowing the market, you’re getting the synergies and cross and upsell opportunities from Wencor. I guess the sequential revenue growth, two part question here, in FSG, sequential growth has ticked higher every quarter, you are over 5%. How do we think about FSG growth if and when Boeing and Airbus can start getting these planes out the door? Would you expect to see some pressure on your volumes? And I mean, you talked about airlines and you’re picking up share, but I’m just I’m just curious if that’s because they’re just operating older equipment longer. And once we start to see some of the global fleet go under higher levels of warranty, is that going to create a natural headwind for you guys?

Eric Mendelson: I certainly hope not. I mean I understand logically what you are saying. But I think that’s also counterbalanced by the fact that a lot of aircraft have been delivered in the last 10 years. And those aircraft are significantly more expensive to maintain than the old ones. And they are all getting ordered by one year every year. So yes, to the extent there is greater retirement that would reduce sales. However, that is being mitigated by this huge group of aircraft that have been recently delivered, and the newer generations and the fleet sizes are significantly larger than the older ones. So I think that’s going to mitigate it. And you look at also the additional products that we offer now in particular with the Wencor acquisition and the display units and all that stuff, we have significantly higher content on these newer aircraft.

So I think that’s going to mitigate it. And then also anecdotally, I can tell you that there are a number of airlines who are in fact, operating, as you suggested, older aircraft. But I can tell you, and don’t exactly quote me on this because if I’m getting it slightly mixed up, I don’t want — but directionally, you’ll understand what I’m saying. For example, on the A320, I think there is not a fifth heavy maintenance check. So they’re continuing — a number of airlines are continuing to operate this aircraft to the end of the fifth maintenance check where they had been planning on doing it. That is not creating any revenue for us. So I think that there is a certain amount of older aircraft that continue to fly which aren’t generating maintenance dollars.

And that stuff is going to be pulled out. So I think you look at all this together — and I’m very bullish. I mean we are not — the team members at HEICO, the leadership, my family, we are not invested in HEICO for any one cycle. We’re invested because we think that this is a very, very excellent space to be with both commercial travel, business and leisure, as well as defense for decades. And there will inevitably be little bumps here and there. But the truth is not even the experts in the industry know where this is going to come out. And historically, we’ve always sailed right through those periods. So I can tell you from an operating perspective, that doesn’t change our direction of travel or our focus on developing new products or making sure we have inventory on the shelf.

Because whenever we’ve been tried — whenever, historically, we’ve tried to be if you will, too cute and too smart, you miss it. And we — HEICO’s strength is because we had the parts on the shelf when no one else did.

Michael Ciarmoli: Got it. That’s helpful. And then just one last quick one, shifting gears back to Capewell and specifically the aerial descent. Is that company and their product lines, are they a competitor with TransDigm’s airborne systems? Or are they complementary? Or just how to think about their positioning in the marketplace?

Eric Mendelson: Yes. I think they are complementary. I think they are complementary. I think that a lot of the release mechanisms are sold to TransDigm, and they’re very complementary in the market.

Michael Ciarmoli: I’ll jump here guys. Thanks for us all, take my question.

Operator: We’ll take our next question from Gautam Khanna with TD Cowen.

Gautam Khanna: Hi, good morning guys. I had a quick question, first for Eric. Just in terms of the aftermarket replacement parts. Did you notice any discernible differences between types of products in terms of relative growth rate, like maybe engine versus airframe or stuff sell through the distribution channel versus direct? I don’t know if there is any way to parse it, but — or is it all kind of the same?

Eric Mendelson: Yes. I would say it’s all the same. I’m not aware of any major trends in one particular area versus the other. I mean there are always puts and takes in the quarter based on a million factors, frankly, we don’t even understand. But no, I’d say that the strength was very, very broad based.

Gautam Khanna: It was. Okay. And in terms of the Wencor integration, and I know you generally don’t integrate things fully. But here, you do have some common product development opportunity and the like I was just wondering like where are we with respect to level of integration relative to where you expect to be kind of a year or two years from now? Are we 50% of the way there? Are we — I’m just curious from a — what have you.

Eric Mendelson: No. I think we’ve done a great job, but I think that there is more. And I think — I don’t want to tip our competitors off as to additional stuff that we can do, but I think that there is still plenty of gas in the tank there. And as I’ve said before, Wencor is going to be — the combination of HEICO and Wencor is going to be the gift that keeps on giving. And I think that there is a lot of additional areas where the businesses can benefit from one another, the customers can benefit. Frankly, we’ve got promotion opportunities within the company. There is a lot of, as we continue to acquire businesses, we need more — we need additional team members to step up and take more responsibility. And I think that when we look at the HEICO and the Wencor team members, really, the sky is the limit for them.

For folks who want to work hard and want to take on more responsibility, we have a lot of, whether it’s acquisitions or whether it’s organic growth, I mean, my gosh, 17% organic growth in the quarter, I mean, that’s like a breakneck pace. And that’s creating all sorts of promotional opportunities for people. The acquisitions they’re creating, promotional opportunities for people. There’s additional stuff that we can do on, in particular, on the repair side, sharing even more repairs, frankly, across our businesses. There is a lot of stuff that can be done. But when you’re growing at 17%, it’s hard just to keep up before you do all that stuff. So where are we? I would say we are definitely, for sure, in the first half. Where are we? We may even be at the first quarter.

I think there is a lot more. But it’s going to happen over time. It’s not going to be something right away, and it is going to work out very well to people’s personal career opportunities as they take on more, because I can tell you we’ve got so many acquisitions in the hopper and one of the greatest constraints that we have is not having enough internal people who we can promote to take on more responsibility at acquisitions. And sometimes we have to pass on acquisitions because we don’t have those internal people. So I think there is going to be a very big opportunity.

Gautam Khanna: Thank you, Eric. And Victor, just one for you. In the past, you’ve called out space at times has been something that lagged. How is that business trending within ETG?

Victor Mendelson: Yes. I think overall, Carlos, correct me if I have it wrong, but this year or this quarter, it’s roughly flattish for us. It’s an important business. Carlos, do I have that right?

Carlos Macau: I’m sorry, was that the organic growth?

Gautam Khanna: Organic in the space.

Carlos Macau: Yes, it is flattish for the quarter. I mean, it’s up, but it’s for the year, it is flattish. It is up a little bit for the quarter.

Gautam Khanna: Perfect. Thanks guys. Appreciate it.

Operator: We’ll take our final question from Tony Bancroft with Gabelli Funds.

Tony Bancroft: Good morning gentlemen and congratulations on a great quarter, and I thought a great job with the Capewell acquisition. I’m grateful to be a five-jump using Capewell’s products and not getting dragged across the Alabama fields at Airborne school. But regarding the displays acquisition from Honeywell, obviously that looks like a great business as well. A lot of opportunity for integration there into those platforms. Are there any other programs on the display side like that out there? I know there is obviously other OEs that do it, obviously, and then smaller companies like ISSC. Just want to get your thoughts on that market.

Eric Mendelson: Yes. We think — Tony, this is Eric. We think the display unit is a really good market to be in. We already do some displays. I can tell you that these displays in particular would be extremely difficult, if not impossible to do unless it was the way that we did it, through the purchase of the Honeywell IP, to be able to overhaul these. So I think that — that’s very important. And we can take their IP and their product and then we are able to combine that with the HEICO high-quality and turn-time that our customers have come to expect, and deliver a terrific product. So I’m very, very excited about this. It really fits extremely nicely within our avionics package at HEICO.

Tony Bancroft: Thank you. Great job.

Eric Mendelson: Thank you. And we’re glad that you’re safe with our Capewell releases.

Tony Bancroft: Yes. Great product. Good, safe product. I like it.

Operator: And at this time, I will turn the conference back to Laurans Mendelson for any additional or closing remarks.

Eric Mendelson: I think we are having a technical challenge. This is Eric. So I would like to thank everybody for participating on our third quarter earnings call. We look forward to speaking with you at our — on our fourth quarter call towards the end of December. If anybody has any questions, please don’t hesitate to reach out to Carlos, to Victor or me or our dad, and we’re happy to speak with you and answer whatever additional questions you have. We thank you very much for your interest in HEICO. We hope you appreciate the great results that we’ve put forth today and look forward to a terrific fourth quarter. So stay well and enjoy the rest of your summer. Thank you very much. This concludes the call.

Operator: Thank you, and thank you for your participation. You may now disconnect.